I know I meant to take up the add-on rhetorical device of references to non-existing distributional mechanisms this week, but I had an interesting discussion with a fellow economist the other day that made me think I could probably say a few more words about the rhetorical device of fake distributional indifference before moving on, specifically for those a little more familiar with economic theory. Normally, I try to write for what I suppose is an averagely educated person in the street who may remember a thing or two about economics from their all but obligatory dose of neoclassical welfare economics in Economics 101, so I assume some background, but I try to eschew economic jargon as much as possible. However, that can actually complicate communication with those accustomed to talking about those issues using that jargon. So this week I’m doing the same thing but with a bit more jargon. By all means give it a shot. I’m still trying to explain it as I go as much as I can, although I cannot of course deliver a course on economics in the space of this blog post. However, if you’re put off by the unfamiliar terms or indecipherable references to theory please rest assured I’m just doing another version of what I did last time in a different context.
So-called “Pareto improvements” are changes that make at least one person better off and no one worse off. They’re of theoretical interest in neoclassical welfare economics because we can use them to show the perfectly competitive market structure performs better (under the usual assumptions and conditions) than other market structures without bringing up potentially controversial distributional issues or ethics. Applying this concept gets one to an “economically efficient,” often somewhat confusingly just called “efficient,” “Pareto optimal” market result, which is a result from which no further Pareto improvements are possible. The concept plays an important theoretical role in establishing that for any non-Pareto optimal result there is some Pareto optimal result that is preferable to it, or “dominates” it. Basically, under any given distribution of economic power, there will be some efficient, Pareto optimal, perfectly competitive market result that dominates the other market structures under that distribution of economic power and hence consistent with the ethical beliefs supporting that particular distribution of economic power.
However, some funny things can happen with the concept of a Pareto improvement. One thing that may happen is one may incorrectly suppose any Pareto optimal result dominates any and all non-Pareto optimal results. That is incorrect because starting from any given distribution Pareto improvements can only get one to certain Pareto optimal results, not all Pareto optimal results. In particular, any Pareto optimal result that corresponds to a distribution of economic power in which at least one person is worse off compared to the starting distribution will not be available via the process of making Pareto improvements. In other words, economic efficiency or Pareto optimality are not global concepts. Any given Pareto optimal market result will dominate certain non-Pareto optimal market results, but not others. Any given economically efficient market result will dominate certain non-economically efficient market results, but not others. Any given perfectly competitive market result will dominate certain non-perfectly competitive market results, but not others. In the cases in which one result does not dominate the other we have distributional issues we cannot resolve using the definition of utility used in economic theory, that is to say, we have distributional indifference. So within the constraints of economic theory one should be indifferent or neutral not only between different Pareto optimal points on the so-called Pareto frontier (the collection of all such points across all distributions of economic power) but between certain Pareto optimal results and certain non-Pareto optimal results, certain economically efficient results and certain economically inefficient results, and certain perfectly competitive market results and certain non-perfectly competitive market results.
Another funny thing that can happen in this area is the ethical or value proposition that economists should consider or discuss or analyze or offer policy advice only on the basis of Pareto improvements may be introduced into economic theory or in discussions ostensibly based on economic theory. Restricting oneself to Pareto improvements breaks distributional indifference because it treats existing distributions differently than other distributions to which one should be indifferent under economic theory. It gives special preference to existing distributional arrangements and the ethics supporting those distributional arrangements. Restricting oneself to Pareto improvements, by precluding consideration of changes that make anyone worse off, are consistent with ethical beliefs relating to distributions that suggest everyone has an ethical claim to whatever he or she happens to presently have, so we should not consider any changes that make anyone worse off, and are inconsistent with ethical beliefs relating to distributions that suggest some people presently have rather more than is ethically justified and should, in fact, be made worse off in order to make others who have stronger ethical claims to those resources that much better off. Introducing the ethical proposition economists should only consider Pareto improvements contradicts distributional indifference based on the definition of utility and really requires explanation of whether it is meant to supplant and negate distributional indifference in terms of neoclassical welfare economics proper, or whether it’s meant to be some sort of subset or sideshow that investigates what happens when one adopts that particular ethical perspective.
Neither of these two awkward bits appears to be stressed in common accounts of economic theory, for what one can only suppose are rhetorical reasons, leaving student, observers, and one suspects even some economists understandably confused about the status of distributional indifference in neoclassical welfare economics. Interestingly, the natural result of both are the same: an exaggerated attraction to arriving at or maintaining perfectly competitive markets and preserving at least some features of existing distributional patterns, and a failure to appreciate or acknowledge what should be indifference or neutrality to doing otherwise.
Just to be clear what I’m arguing here; it’s perfectly fine for economists to hold ethical beliefs relating to distributional issues, and it’s perfectly fine for them to develop a theory expressing their beliefs. That’s not the problem I’m addressing at all. People can have ethical beliefs and argue for them. But if they do, they should be clear they’re doing it, own it, explain it, take steps to avoid any confusion on that point. It’s misleading to make a big deal about distributional indifference in the context of defining utility then go beyond it later based on some other and unstated ethical reasoning without highlighting the fact. Economists have certainly had plenty of time to do that, and their failure to do so can I think only plausibly be ascribed to incompetence as far as the ethical philosophy they’re dabbling in or bad intent and a willful impulse to deceive. We need to fix bad economics and in particular confront the rhetorical device of fake distributional indifference. Distribution indifference is either there or not there. Choose one. No one can have his or her cake and eat it too, not even the mighty economist.
